Office of the State Treasurer

	The AMA is designed to capture revenue equitably from all companies with an economic presence in New Jersey, including out-of-state companies that now pay no corporate taxes. Companies will pay either the AMA or the Corporation Business Tax -- whichever is greater.
	To protect small businesses, the first $2 million in gross receipts and $1 million in gross profits would be exempt from the AMA. This threshold excludes approximately 70 percent of existing corporate business taxpayers from the AMA.
	Sub-Chapter S Corporations are entirely exempt from the AMA. Professional corporations are also exempt from the AMA.
	Other protections for small businesses remain, including an immediate tax cut of 13 percent for 20,000 small businesses.
	In addition to more favorable treatment under the AMA, the reform proposal still includes an expansion of the job creation tax credit to include more mid-sized companies.
	The final AMA formula allows businesses with gross receipts of up to $20 million to exclude a portion of gross receipts or gross profits from the AMA on a phase-out basis.
	Companies with more than $20 million in gross receipts/$10 million in gross profits would pay an AMA rate on total gross receipts/profits based on a graduated table.
	The AMA would sunset for in-state corporations by June 30, 2006. The AMA would remain in place for out-of-state corporations do business in New Jersey but are not subject to the CBT.
	The AMA would be capped at $20 million for a group of related companies.

Will any companies still pay the $200 minimum CBT?

No. The $200 minimum is being replaced. Two minimum CBT fees of $500 and $2000 would be established. All corporations would pay the $500 minimum, except corporations affiliated with groups or parent companies that have payrolls of $5 million or more would pay the $2,000 CBT minimum.

How will the changes close tax loopholes?

The Corporate tax reforms close several major loopholes cited by tax experts and economists as ones used by major and multi-state corporations to erase their net income on paper and make it possible to avoid New Jersey corporate taxes.

Royalties

	The reforms disallow royalty payments as a deduction from New Jersey's CBT, when those royalty payments are made to a parent or affiliated company. New Jersey is home to multi-state companies that have considerable assets, including intellectual property assets such as trademarks. As a tax avoidance strategy, some companies have created business affiliates in other states - Delaware in particular - that do not tax royalty income.
	Then, the out-of-state affiliate charges the New Jersey company a licensing fee for the use of the trademark. This allows the New Jersey company to write off the royalties as a business expense, thus lowering its profits and reducing or eliminating its CBT liability.
	In a very real sense, they pay themselves, write it off as a business expense, and then use the transaction to lower their tax liability in New Jersey. Closing this loophole captures revenues that would otherwise escape through this tax avoidance.

Interest Income

	Interest expenses are currently deductible from the net income reported to New Jersey under the CBT. Corporations can shelter taxable profit by shipping it to subsidiaries or affiliated companies in other states that have less tax or no tax. This is done through interest paid by the New Jersey company on a "loan" from an out-of-state affiliate.
	The reforms close this loophole, yet maintain the deduction for legitimate cases in which an interest-paying corporation is a guarantor of a loan to a third party.
	Under our reforms, 100 percent of the interest paid to affiliate entities would be added back into net income reported to the CBT.

Throwout Rule

New Jersey has no Throwout or Throwback Rule. Multi-state corporations that earn income in many states must allocate a share of the income for taxation in New Jersey. The larger the amount of sales earned in other jurisdictions, the smaller the share of income apportioned to and taxable in New Jersey. Companies with sales in other jurisdictions where they are not taxed can nevertheless count those untaxed sales in their national totals and thereby lower the income apportioned to New Jersey.

A Throwout Rule means if sales earned in other jurisdictions are not taxed there, they cannot be counted when computing the fraction of total taxable income subject to New Jersey tax. The original CBT reform proposal called for the enactment of a full Throwout Rule. The now-amended reform provide a $5 million cap, thus limiting the impact the new Throwout Rule can have on any group of companies.

Ending Exclusions

The CBT reforms also level the playing field by ending special tax advantages enjoyed by select types of companies. Investment companies enjoy a preferred tax status under the CBT. New Jersey defines an investment company as a business engaged in managing its own portfolio. The CBT defines the taxable income of such companies as just 25 percent of their entire net income. The reforms raise the taxable income to 40 percent of net income.

The same fairness principle applies in subjecting Savings and Loan Associations to the Corporation Business Tax. Unlike most other financial institutions, S&Ls currently pay no CBT. Instead, they pay only an annual excise tax equal to 3 percent of net income. That tax was enacted in 1973. The reforms bring S&Ls in line with what other depositary institutions pay - the 9 percent CBT.

Dividends

	Companies that receive dividends from subsidiaries in which they own an 80-percent interest or more are currently permitted to exclude dividend income from taxation. Companies receiving dividends from subsidiaries in which they own less than an 80 percent share must report as taxable income 50 percent of the dividend income.
	Initial reforms deemed all dividends as fully taxable, providing an incentive for companies to voluntarily file federal consolidated tax returns. Subsequent changes to the reforms restored the current law on the exclusion of subsidiaries if the parent company has a 50 percent or greater ownership interest.
	Loopholes are closed without adversely affecting corporations that receive legitimate dividend revenues:
	1)	Dividends from 80-percent owned and operated subsidiaries will remain tax-free, as they are currently.
	2)	Dividends from subsidiaries in which the parent company owns an interest of between 50 percent and 80 percent will be 50 percent taxable, as they are currently.
	3)	Dividends from subsidiaries in which the parent company owns less than a 50 percent share will be 100 percent taxable. Under current law, only 50 percent of these dividends are taxable.

What other components make up the corporate tax reforms?

Net Operating Losses (NOLs)

	Loophole closures represent long-term, sustained reforms to restore our CBT to its status as a viable revenue source for New Jersey. Suspension of the carry forward of net operating losses, or NOLs, provides more immediate budgetary relief to address the State's current fiscal crisis.
	Net Operating Loss rules allow companies to reduce their corporate business tax payments by deducting Net Operating Losses for a period of up to seven years. Our legislation will defer this accounting procedure for two years.
	Delaying this rule means only that companies that earn a profit this year will pay tax this year and will not carry forward losses from as far back as seven years ago to reduce their tax this year. While NOLs are deferred for two years, two years are also added to the back end of the existing seven-year period. Thus, ultimately no company will lose the opportunity to write off those losses from prior years.

Processing Fee

The reforms allow New Jersey to assess a $150 processing fee for Limited Liability Partnerships and Limited Liability Corporations. The fee would be assessed for each K-1 form filed by a member/partner with the State. Partnerships fewer than three members would be exempt from the fee. Partnerships would not be subject to the $150 K-1 filing fee if they do not derive income in New Jersey. The clarification ensures that there are no financial disincentives for out-of-state partnerships to accept New Jersey partners.

The State estimates that half of K-1s filed in New Jersey come from out of state residents who are involved in New Jersey LLCs, LLPs and Partnerships.

Prepayment of third quarter taxes in 2003

	A one-time prepayment of third quarter taxes in 2003 would be due by June 15 for those companies with $50 million or more in sales.
	· The prepayment would affect only New Jersey's largest companies, while providing revenue to offset the partial exclusion of dividend taxation, which benefits many large corporations.